The owner of Serra Investments Home Loan in Burlingame paid $6,000 for several "trust" contracts. He signed his business and personal assets into the "trusts," then wrote off those assets from his tax returns.

Ferem bought into what the Internal Revenue Service says is a bogus tax shelter. Such "fraudulent trusts" are costing the federal government billions of dollars and victimizing unsuspecting taxpayers, the IRS says.

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In a growing crackdown nationwide, the IRS and Justice Department have launched 200 investigations into what the government calls fraudulent trust schemes.

While National Trust has not been charged with any wrongdoing, federal agents are targeting suspected con artists who sell thousands of fake trust documents that claim to shield taxpayers' personal and business assets from Uncle Sam, according to government officials and tax attorneys.

"It's the hottest tax shelter scam of the '90s," said Michael Jenkins, an IRS enforcement and fraud official in San Jose.

Last year, Ferem began to have doubts about the trusts he'd bought into. A lawyer friend told him the contracts looked fishy. Then, five months ago, the Internal Revenue Service sent Ferem a letter warning that the "trusts" had "no merit whatsoever."

Ferem hired San Francisco tax attorney Robert Sommers, who also told him the trusts appeared to be fraudulent. The businessman quickly filed two amended tax returns, paying back taxes and interest to the IRS - and avoiding possibly more severe penalties.

A rapid rise&lt;

Tax experts say an increasing number of the 3 million trust returns sent yearly to the IRS are sham fiduciary arrangements set up to look like real trusts.

Small-time fraud artists have used crude versions of the trust scheme for decades. But since the mid-1990s, investigators say they have seen a rapid rise of well-run scam operations that dupe consumers around the country. The outfits train salespeople and use mass marketing techniques, from hotel seminars to Internet Web sites.

"Their growth has been alarming," said Richard Speier, IRS director of investigations in San Francisco. "There are a lot of snake oil salesmen out there."

Before last year, fraudulent trusts often went unnoticed and were rarely audited, according to tax attorneys. Not now. In the last year, the IRS has had hundreds of agents poring through piles of tax returns, hunting for potentially fake trusts.

Since the crackdown began, the federal probes have led to 46 criminal indictments, 1,000 audits of firms and individuals and 200 civil cases in U.S. Tax Court in Washington, D.C., said IRS spokesman Don Roberts.

"We're definitely seeing more of it, and it's not going away," warned Robert Temmerman, an attorney at Temmerman & Desmarais in Campbell and chair of the state bar's Estate Planning, Trust & Probate section.

IRS at your door&lt;

In U.S. District Court in Sacramento, prosecutors have accused four men of staging an elaborate scheme to evade taxes. Ronald Chappell, Todd Gaskill, Martin Goodrich and Lloyd Winburn allegedly hid hundreds of thousands of dollars of their clients' money in trusts and bank accounts in the United States and the Caribbean.

Last week, the prosecution's key witness, a softspoken dentist from Clovis named Dana Gawley, testified he had bought several trusts from the men for $10,000 five years ago after being promised he could "reduce his tax base" after transferring dental practice income, home furnishings and other expenses into the trusts.

Doing as he was told, Gawley paid almost no taxes on $400,000 of income from 1993 to 1995. But the purported tax shelter soon ended. A year later, an IRS investigator knocked on his door. Gawley's advisors were the targets of a grand jury probe.

Alleged victims of fraudulent trusts nationwide include lawyers, construction workers and elderly retirees, IRS investigators say, and they are losing millions of dollars in fees to the trust promoters.

The phony trusts shouldn't be confused with legitimate trusts, which are common legal arrangements in which a trustee handles another person's assets. Trusts often are used for charitable gifts and estate planning, or to hold assets for children or elderly people who cannot run their own affairs.

In some real trusts, assets may be taxed at lower rates. For instance, a bypass trust allows parents to pass on their assets to their children while reducing the big hit of estate taxes.

But the promoters of fake trusts make many illegal and questionable promises, according to court papers, government officials and tax attorneys.

They tell clients they'll pay zero personal income, gift or estate taxes if they transfer their assets into trusts set up by the promoters.

Or clients are advised they can use the trusts to write off business and personal expenses, or depreciate their home furnishings, entertainment expenses and children's college costs.

Promoters also claim their contracts - often called

"constitutional trusts," "common-law trusts" or

"pure equity trusts" - are immune from federal law or the courts.

In some cases, their clients are wealthy investors, small business people or anti-tax protesters who know the trusts are illegal. They feign ignorance, hoping to get away with the scam, investigators said.

"There's nothing wrong with using trusts legally," IRS official Speier said. "But when trusts are used as a tool to evade taxes, we have problems with that."

Best-known promoter&lt;

Locally, the IRS has sent warnings to taxpayers who've sought shelter with documents prepared by one of the largest and best-known trust promoters, National Trust Services in the South Bay, according to several tax attorneys. Burlingame businessman Joseph Ferem was one of those receiving a letter saying the trusts have "major flaws" and are clearly designed "for unlawful tax avoidance."

National Trust Services stages $10,000 seminars in Milpitas and the Cayman Islands and boasts thousands of clients in the United States, Mexico and Japan, according to its Web site (www.trusts.org).

The company was founded a decade ago by 54-year-old Leroy Fritts and 44-year-old Roderick Prescott. The firm's 22 employees posted $1.9 million in sales last year, reports Dun & Bradstreet Inc., the Chicago credit rating firm.

Court records show that federal agents first heard of the firm in 1992, when it hosted $10,000 seminars at the Embassy Suites, the Sunnyvale Hilton and other South Bay hotels.

Hide your assets&lt;

In workshops attended by an IRS undercover agent and a confidential informant in 1992, National Trust and its associates made several illegal claims, according to search warrant records in U.S. District Court in San Jose:

*Clients allegedly were told they could hide their assets in business, family or charitable trusts, where the assets would be safe from lawsuits or bankruptcy.

*The trusts were contracts that could "never be challenged" by the IRS, clients allegedly were advised.

*Clients allegedly were told there was no need to consult with attorneys because the trusts were legal - a "secret of the wealthy."

In her search warrant affidavit, IRS agent Wendy Schock alleged that Fritts and Prescott "promoted a scheme in which individuals who owned their own businesses could hide personal assets. ... The trust concept used by NTS ... appeared to be nothing more than an illegal attempt to evade taxes."

One morning in 1993, IRS agents raided one of National Trust's main offices, based in a white four-bedroom house and garage on Rosa Court in a middle-class neighborhood of Sunnyvale.

Over the next five hours, the agents scooped up computers, business videos, clients' files, bank records and other documents, according to court records.

National Trust executives, who have not been charged with any civil or criminal wrongdoing, did not respond to several telephone calls and a faxed letter from The Examiner. Federal officials declined to say whether National was under investigation.

Taxpayer resentment&lt;

Here is how some trust promoters across the country operate, according to court records, government officials and lawyers familiar with trust operations:

Some promoters roam from town to town, said James Quillinan, a lawyer at California Trust & Estate Counselors in Mountain View. They stage the scam in one city, defraud hundreds, then vanish.

They often draw customers through newspaper and radio ads, cable TV commercials or the Internet. They stuff flyers into mailboxes. They befriend the elderly in churches, doing their housework or buying their groceries.

The action increases after April 15, when taxpayers resent the IRS, according to Sommers, a San Francisco attorney who also writes "The Tax Prophet" column for The Examiner.

"People want to believe there's a magical cure that will eliminate their taxes, and these trust scams sound legitimate," Sommers said.

Horrors of taxation&lt;

After attracting people to free seminars, many promoters persuade them to pay $8,000 to $15,000 to attend workshops at respectable hotels.

While the audience sips drinks and nibbles on hors d'oeuvres, well-groomed speakers condemn the horrors of taxation. Speakers identified as lawyers and accountants cite court cases and extol the "tax-free" benefits of their "trusts." By now, the audience is hooked.

Consumers sign contracts that transfer their family and business assets into several trusts. They often pay from $500 to $3,000 in "maintenance fees" and other costs to keep the "trusts" going, tax experts say.

If they run a small company, their business income might be put into a "business trust" and deducted on their tax return. Or they may sign over the title of their house to a

"family residence" trust, then write off their mortgage payments and home furnishings.

But often, "Their paperwork is invalid because the trusts were formed for improper purposes, to circumvent the tax laws," said attorney Sommers. "It's a sham all the way."

To hide their trail and throw off auditors, promoters may illegally file a client's tax returns in four or five IRS districts by using different employer identification numbers.

Or promoters may wire their clients' assets to the Carribean or Latin America into complex webs of offshore trusts, the common overseas fiduciary vehicles often misused by criminals to launder money. Then, the money is quietly recycled home to clients' bank accounts, government officials said.

"It's like a game of chess," said IRS official Jenkins.

As the promoters of fake trusts spread around the country, tax lawyers and federal investigators say they're getting more telephone calls from anxious consumers.

"Fortunately, we can easily spot the scam and warn clients to stay away," said Quillinan, the attorney in Mountain View. "But some people go ahead and sign up anyway. They're putting themselves in a tremendous amount of risk."